Harbinger Capital and Hedge Fund Adviser Philip Falcone To Settle SEC Fraud Charges by Paying Over $18M and Admitting Wrongdoing

The SEC says that Philip A. Falcone and his Harbinger Capital Partners will pay over $18 million and admit wrongdoing related to its securities fraud case alleging the improper use of $113 million in fund assets to cover the hedge fund advisor’s personal taxes. The Commission also is accusing them of secretly placing a preference over specific customer redemption requests at cost to other investors and performing an improper “short squeeze” involving bonds that were put out by a Canadian manufacturer.

Not only are Harbinger and Falcone admitting wrongdoing but also they are acknowledging that they committed numerous acts of misconduct that hurt investors and got in the way of the securities market’s proper functioning.

Admissions by Falcone and Harbinger, as set out by papers submitted to the court:
• The improper borrowing of $113.2 million by Falcone from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate below what the fund was paying to borrow money. Investors weren’t told about the loan for months.

• The bestowing of federal redemption and liquidity terms to specific investors in HCP Fund I without disclosing all arrangements to other investors and the fund’s board.

• Falcone suggested that customers short the Canadian manufacturer’s bonds in 2006 after discovering that a Financial Services Firm was doing so.

• Getting back at that firm later that year for shorting the bonds by getting Harbinger’s funds to buy all of the outstanding bonds left in the open market.

• Demanding that the firm settle outstanding bond transactions and deliver what bonds were owed while failing to reveal that the company likely wouldn’t be able to get any bonds to deliver because all almost all of them were tied up in the custodial account of the Harbinger funds, which were not making them available for sale.

Because of the way that the defendants improperly dealt with the interplay of bond demand and supply, the bonds’ price went up by over double.

The U.S. District Court for the Southern District of New York has to approve the hedge fund fraudsettlement. Per the terms of the agreement, Falcone must pay disgorgement of $6,507,574 and prejudgment interest of $1,013,140 plus a penalty of $4 million. He also has agreed to a judgment entry that prevents him from associating with any dealer, broker, municipal securities dealer, investment adviser, transfer agent, municipal advisor, or statistical rating organization that is nationally recognized but can apply again in five years. However, during the bar, Falcone has permission to liquidate his hedge funds while an independent monitor supervises. Also, he isn’t precluded from taking on the role of director or office at a public company. The agreement also doesn’t come with an injunction against future securities law violations.

The Harbinger entities have to pay a penalty of $6.5 million.

This is the first time that the SEC has employed its new policy to obtain admissions of fault in certain securities cases.  If you feel you are the victim of Securities Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.


The Resolution Law Group: SEC Charges SAC Capital Hedge Fund Adviser Stephen Cohen Faces With Failure to Stop Insider Trading

The Securities and Exchange Commission is charging Stephen A. Cohen with failure to supervise two portfolio managers and stop them from insider trading. Cohen is the SAC Capital. The SEC wants to ban the hedge fund mogul from supervising investor funds. A spokesperson for SAC says the securities case is meritless and Cohen always behaved appropriately.

According to SEC Division of Enforcement Co-Director Andrew Ceresny, even though it is the job of a hedge fund manager to properly supervise his/her employees and make sure that everyone is in compliance with securities laws, Cohen failed to act after finding out about red flags indicating that portfolio managers Michael Steinberg and Mathew Martoma may have been engaged in insider trading. The agency says that Cohen received “highly suspicious information” that should have compelled any reasonable hedge fund manager to look into the basis for trades made by Steinberg and Martoma. Instead, he purportedly let them execute the trades and even gave Martoma a $9 million bonus. Because of the illegal trades, the SEC contends, Cohen’s hedge funds made profits while avoiding $275 million in losses.

Already, SAC Capital affiliates have agreed to pay the SEC more than $615 million over the insider trading charges. The Commission says that, Martoma, affiliate CR Intrinsic Investors’ portfolio manager, received confidential data about an Alzheimer’s drug from a doctor who told him about clinical test results before they became public. Martoma and the affiliate then sold over $960 million in securities of Wyeth and Elan Corp., the two pharmaceutical companies that developed the drug, in the span of the week.

To settle the SEC’s case, CR Intrisinc said it would pay $275 million penalty, $275 million in disgorgement, and $52 million in prejudgment interest. Another SAC Affiliate, Sigma Capital, said it would pay $14 million over insider trading allegations to the SEC.

As for Steinberg, he is accused of insider trading in Dell securities. The SEC says that rather than find out whether Steinberg had material non-public information and was insider trading, Cohen followed Steinberg’s recommendation and sold his own shares in Dell. Meantime, Steinberg allegedly used that insider information as the basis for short-selling of Dell shares in his portfolio with Sigma Capital. Shortly after. Dell made its earnings announcement on August 28, 2008, its stock prices dropped. Funds overseen by Cohen’s firms, however, either made money or avoided losing at least $1.7 million.

The SEC is accusing Cohen of violating the Exchange Act’s Section 10(b) and Rule 10b-5 thereunder. He could be ordered to pay financial penalties and be barred from the industry.

If you feel you are the victim of Securities Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

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